Oil Drops as U.S. Manufacturing Shrinks in June

By Moming Zhou -
Jul 2, 2012

Oil fell after manufacturing in the
U.S. unexpectedly shrank in June for the first time in almost
three years.

Prices dropped 1.4 percent as the Institute for Supply
Management’s U.S. factory index fell to 49.7 in June from 53.5 a
month earlier. Euro-area unemployment reached the highest level
on record in May, the European Union’s statistics office said
today. Oil’s decline followed a 9.4 percent jump June 29.

“The ISM number strongly suggests that we’ve got a long
haul before we see improvement in the economy and oil demand,”
said Michael Lynch, president of Strategic Energy & Economic
Research in Winchester, Massachusetts. “Economic data combined
with the spike on Friday are going to convince people to get out
of the market.”

Crude for August delivery decreased $1.21 to settle at
$83.75 a barrel on the New York Mercantile Exchange. Prices
climbed $7.27 on June 29 to $84.96. The percentage gain was the
biggest since March 12, 2009. Oil is down 15 percent this year.

Brent oil for August settlement on the London-based ICE
Futures Europe exchange fell 46 cents, or 0.5 percent, to end
the session at $97.34 a barrel.

U.S. Forecast

“EIA was looking for Brent to be at about $110 or so in
the second half of the year,” Sieminski said today at a Platts
Energy Podium event in Washington. Since then, lower forecasts
for global economic output “and the impact that would have on
demand could end up in our models pushing that price forecast
down a little bit,” he said.

Brent averaged $113.61 in the first half of 2012.

The June ISM index was lower than the forecast of 52 by
economists surveyed by Bloomberg. The gauge averaged 55.2 in
2011 and 57.3 in the previous year. Readings less than 50 signal
contraction. Manufacturing accounts for about 12 percent of the
economy and has been at the forefront of the recovery that began
in June 2009.

The jobless rate in the 17-nation euro area rose to 11.1
percent in May from 11 percent in April, the EU’s statistics
office in Luxembourg said today. That’s the highest level since
the data series started in 1995.

Unemployment climbed to 17.561 million people in May, an
increase of 88,000 from the previous month, the report showed.
Spain’s unemployment rate, the steepest in the EU, increased to
24.6 percent from 24.3 percent a month earlier.

Oil Demand

“The economic data doesn’t seem to suggest oil demand is
going to be very explosive, and the demand expectation is
softening,” said Phil Flynn, senior market analyst at the Price
Futures Group in Chicago. “The market realized that maybe
people overreacted last week and we are pulling back to a more
normal area.”

The euro fell as much as 0.8 percent to $1.2568 after the
European unemployment report. A weaker euro and stronger dollar
reduce oil’s appeal as an investment alternative.

The HSBC Manufacturing Purchasing Managers’ Index for China
fell to 48.2 last month from 48.4 in May, according to the final
reading of the gauge released by HSBC Holdings Plc and Markit
Economics today.

Slower growth in China may curb demand this year and next,
the Energy Department said June 12 in its Short-Term Energy
Outlook. Consumption in the U.S., the world’s largest oil user,
will drop for a second year in 2012, the department said. Demand
in Europe will also decline both this year and next, the
department said.

Iranian Bill

Futures pared losses earlier on a report that the Iranian
parliament is working on a bill to block oil tankers from
passing through the Strait of Hormuz, the transit point for
about 20 percent of globally traded oil, in retaliation for
international oil sanctions.

Under the draft legislation, Iran would block tankers
carrying crude to countries that have initiated new sanctions,
Javad Karimi-Ghodousi, a member of the parliamentary national
security and foreign policy committee, said in an interview with
Jam-e-Jam, a Tehran-based newspaper. He named the EU, the U.S.
and Israel as targets of the measure.

European Sanctions

The European Union banned the purchase, transportation,
financing and insurance of Iranian oil starting from July 1
because of the Persian Gulf nation’s nuclear program.

Sanctions on Iranian oil will probably trim the country’s
exports to near 1 million barrels a day and could rival the loss
of Libyan supplies last year, Goldman Sachs Group Inc. said in a
report today. The sanctions’ impact on the global crude market
will be bigger than the bank previously estimated, analysts
David Greely in New York and Jeff Currie in London wrote in the
report today.

Libyan oil supplies dropped to 45,000 barrels a day from
almost 1.6 million last year amid unrest that led to the ouster
of former leader Muammar Qaddafi, based on Bloomberg production
estimates.

Electronic trading volume on the Nymex was 477,834
contracts as of 3:03 p.m. in New York. Volume totaled 787,945
contracts on June 29, 40 percent above the three-month average.
Open interest was 1.44 million.